5/30/23
The
Market
Technical
After a week of
high volatility, the S&P ended above that Fibonacci 23.6% retracement level
(~4200). If it remains there through the close on Wednesday it will confirm a breakout
of this year-long trading range. While Market breadth remains terrible, investors
have gotten jiggy with the likelihood of a rate ceiling deal and the limitless
prospects for AI. As you know, I am quite skeptical of any upside momentum. Indeed,
even the bulls are projecting only a 4300 year end valuation. Your math wizards
will quickly realize that is a mere 2.3% higher than current prices, which
frankly won’t match the return you can get on short Treasuries. I can’t help
but be nervous about where this will all lead. But if the breakout is confirmed,
I will likely put some money to work---there are plenty of stocks out there
that have been crushed and represent value.
The long bond continued
its downward journey, but did manage to bounce off the lower boundary of its
intermediate term downtrend. Of course, if the stock jockeys are right in the
first instance (i.e., no recession/a debt ceiling deal/the banking crisis is
over) that would suggest a tighter for longer Fed policy as inflation remains a
persistent problem---which, in turn, would tend to keep interest rates
high/bond price low. Historically, a tight Fed has not been especially good for
equities. So, you see the conundrum. Of course, stock investors may want it
all---no recession, a debt ceiling deal, the banking crisis is over AND an easy
Fed. I will let you decide if that is reasonable. And that is part of what
keeps me nervous.
Gold continued to
take it on the chin. It successfully challenged the lower boundary of its very short-term
uptrend and will likely make a run at its 100 DMA this week. This is really the
first sign of weakness in gold for some time. Just to remind you that it
remains in long and intermediate uptrends and above both DMA’s. While all this
is a plus, we are also looking at higher stock prices, higher interest rates
and a stronger dollar, none of which is good for GLD.
The dollar had another
great week. It is now challenging its 200 DMA and appears ready to challenge
the upper boundary of its short-term trading range. If successful on both
counts, it would clearly re-establish upside momentum. That would all fit with
the optimistic economic scenario being discounted by stock investors.
Friday in the
charts.
https://www.zerohedge.com/markets/tech-tops-dow-drops-bonds-flop-hawkish-inflation-signals-send-rate-hike-odds-soaring
Fundamental
Headlines
The
Economy
Last Week Review
The
US stats last week were mixed (the overseas data were again quite negative)
though the primary indicators were positive (one minus, two neutral, three plus).
In short, the numbers are coming in upbeat with no clear near-term signs of a
recession and certainly no sense of how deep it may be if it occurs at all.
As you know, I am not an optimist on this count; but to date, we are
still lacking sufficient evidence to back up a recession forecast, although
some historically accurate forward-looking indicators like the yield curve and the latest
read on the leading economic indicators are still predicting one. However,
time is running out on the doomsayers. I am not conceding a no recession/soft
landing outcome yet but clearly my conviction remains greatly diminished.
The
other issue investors must deal with is, of course, inflation. And perhaps more
importantly, how the Fed perceives this problem and even more important, just
how firm is its determination to achieve its 2% target. As you know, I believe
that inflation is the red-headed stepchild of Fed priorities. Not without
cause---the Fed has proven time and again that that any sign of
economic/financial/Market turmoil will result in the immediate reversal of any
tight money measures. So, if we rely on history, the Fed won’t likely be the
instrument of 2% inflation.
Bottom
line: my best guess is that there is a recession (though my conviction weakens
by the week) and that at the slightest hint of economic/Market disruption, the
Fed folds, leaving inflation as an ongoing problem.
Longer
term, irrespective of what happens over the next year, we are still faced with
a struggling economy growing at well below its historic secular rate.
Regrettably, years of fiscal profligacy have left us with a debt to GDP
ratio far in excess of the boundary marked by Rogoff and Reinhart as the level
at which the servicing of too much debt negatively impacts the growth rate of
the economy. And years of irresponsible monetary expansion have led to the
misallocation of resources and the mispricing of risk.
Correcting those self-inflicted wounds won’t be easy. It will take years
of fiscal and monetary restraint to do so. And that would mean less fiscal
stimulus and interest rates staying higher for longer than many now expect---which
unfortunately is not apt to happen.
The
Economy
US
International
April Japanese unemployment was 2.6% versus consensus of 2.7%.
The May EU economic sentiment index was 96.5
versus predictions of 98.9; the April
industrial sentiment index was -5.2 versus -4.0; the May service sentiment
index was 7 versus 10.2; consumer confidence was -17.4, in line.
Other
There is a problem in China.
https://www.zerohedge.com/markets/theres-something-rotten-china
The
Debt Ceiling
The Deal---and what a Deal it is.
https://www.zerohedge.com/markets/total-farce-real-spending-under-debt-ceiling-deal-actually-goes-next-year
The day after.
https://www.zerohedge.com/markets/morgan-stanley-day-after
China
Chinese shadow banking defaults
surge.
https://www.zerohedge.com/markets/china-shadow-banking-defaults-surge
Bottom line.
Latest from BofA.
https://www.zerohedge.com/markets/another-bout-risk-late-june-hartnetts-gloomy-view-world-9-charts
The argument for ‘buy and hold’
strategy.
https://humbledollar.com/2023/05/losing-value/
News on Stocks in Our Portfolios
What
I am reading today
How hypersonic missiles work and the threat
that they pose.
https://theconversation.com/chinas-hypersonic-missiles-threaten-us-power-in-the-pacific-an-aerospace-engineer-explains-how-the-weapons-work-and-the-unique-threats-they-pose-206271
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